Introduction

Many countries allow a limited accumulation of tax-sheltered retirement savings during the working life of the taxpayer. On retirement, these savings are usually converted to a stream of annuity payments taxable in the hands of the recipient. In Singapore, where substantial retirement savings are compulsory for all employees, tax treatment is even more beneficial. All contributions to the Central Provident Fund (CPF) are fully excluded from chargeable income for tax purposes, and the benefits emerging on retirement are not taxable. Because the Singapore personal income tax has a progressive rate structure, a dollar of deductions has a different value in each tax bracket. It is obvious, therefore, that the gains from the combination of the CPF deduction and the income tax system must vary with income. Chanoch Shreiber and Wee Chow Hou each published findings showing very substantial variations in rates of return on savers' CPF contributions, depending on their income bracket.

This chapter reports the results of a study using Wee Chow Hou's methodology, with a modified interest rate assumption for the CPF, along with contemporary income tax rates and contribution rates to the CPF. Our results show that rates of return of CPF savers have decreased considerably, but continue to vary directly with incomes, and inversely with the length of the accumulation period. The largest declines occurred for the highest income groups and for the shortest accumulation periods.

Method

Wee Chow Hou examines the case of fourteen taxpayers whose “chargeable income” for tax purposes corresponds to the lower limit of each non-zero tax-bracket under the rules then prevailing. He calculates their employer-employee CPF contributions, and accumulates these forward at the then prevailing CPF interest rate of 6.5 per cent to 5, 10, 15, 20, 25, 30, and 35 years. Each resulting terminal value is then compared, at an unknown return rate re, to a corresponding sacrifice stream consisting of contributions net of the tax savings occasioned by the favoured treatment of CPF contributions and accumulations.